FT has been trading full time from home for two years, with nothing but four kids and a beach to distract him .
He fills his spare time with weight training and rugby, though more coaching than playing these days.
FT mostly trades the forex markets and although he plays FTSE on occasions his bread and butter market is £$.
He likes to think that his technique is evolving but still hasn’t the temperament or money to back the big calls. He prefers to trade between 1 and 3 times a day, aiming to take regular small gains, but feels part of the evolution is in not dealing if the conditions don’t feel right.
A Pivot Points Moment
Morning folks,
With most of this morning’s markets providing as much excitement as watching drying paint, I thought I’d throw a few bats’ wings and toads’ testicles in the cauldron and come up with a bit of technical analysis. So grab a coffee and make sure you’re sitting comfortably, whilst I talk pivot points.
Hopefully by now you’re pretty happy with basic support and resistance lines; if not, check out Support And Resistance Lines. Well, pivot points are sort of support and resistance lines designed by pointy-head mathematicians who decided to follow Fibonacci’s example (Fibonacci Retracements) - if there isn’t an obvious set of points to draw a line across then why not make one up using lots of clever maths? The spooky thing is that these lines, although constructed mathematically, often coincide with previous points of support and resistance.
The point of pivot points (no pun intended) is that a lot of traders use them as a simple guide to day-trading. At its simplest, if the price opens above the pivot point then there’s a bias towards long bets; if it opens below then the bias is towards short bets. I use it as a starting point when I switch on my screens, rub my eyes and wonder which way to trade. While listening to the early news headlines I’ll stick the main pivot point, along with the key support and resistance (S1,2,3 and R1,2,3) on my chart, like this:
Sometimes (and this is one of those times) the gaps between the S&R levels can be so far apart that they don’t feature on the smaller intra-day chart. Here I’ve just put in the main pivot point at $1.8418 and the first resistance point at $1.8510. You can see that the price began the European trading day above the pivot point. It dropped briefly below in the notorious early session, when the bad guys try to find and trigger stop losses, but quickly bounced back above it to slowly rise over the course of the morning.
The most popular pivot points are the pivot point itself and 3 lines of support and resistance either side of the main line. They’re calculated using the previous day’s high, low and closing values (this is a bit trickier in the 24/7 forex market, but the general rule is to use the price at 10 pm as the closing price). I don’t want to get too heavy here, so if anyone’s really interested in the calculations I’ve hidden them at the end of the blog.
These lines can be traded just like other other support and resistance lines, trading the bounce off support or the break through the lines. But just like trading with the trend, the bias remains to trade short below the line and long above it.
I’m already in the GBPUSD trade; I bought a tentative £1 long bet last night at $1.8375 and feel more reassured by the price holding above the pivot level. There’s been a steady rise in Sterling and the Euro this morning, but I expect some hesitation ahead of the $1.85 big figure. The first line of resistance (R1) is at $1.8501 and the hugely erratic US durable goods numbers are due out at 1.30pm. (You can check when economic data will be released in paddypowertraders Weekly Wrap.) As this is a cautious push against the trend I don’t see too many people taking chances; I’ll be bringing my stop right up to the bumper babe ahead of the numbers to protect my gains and, if my stop gets hit I’ll step back and see whether the reversal has the legs to justify backing it again. For now, my stop’s at a cautious $1.8415, just below the pivot line.
Happy Trading
Pivot Point Calculations:
Pivot Level = ( High + Close + Low )/3
Resistance 3 = High + 2*(Pivot Level- Low)
Resistance 2 = Pivot Level + (R1 - S1)
Resistance 1 = 2 * Pivot Level - Low
Support 1 = 2 * Pivot Level - High
Support 2 = Pivot Level - (R1 - S1)
Support 3 = Low - 2*(High - Pivot Level)
Example:
Let’s take GBPUSD as an example; the previous day’s high, low and close were 1.8518, 1.8335 and 1.84 respectively. So the pivot point would be worked out as (1.8518+1.8335+1.84)/3, which equals 1.8418. The first resistance level, R1, would be 2 X 1.8418-1.8335 equals 1.8501; the first support level, S1, would be 2 X 1.8418-1.8518, which gives you 1.8318. You get the picture? Why not finish off the rest and go to the top of the class.
A handy hint would be to set up an Excel spreadsheet and input the paddypowertrader data, as this is the data you’ll be trading from (there can be subtle differences, especially when it comes to equities and indices where the opening hours are different, so the closing levels will differ). However, if you want to cheat, try ActionForex Pivot Points, though please note that this isn’t a recommendation.
August 27th, 2008 at 12:52 pm
Strong durable goods numbers (always erratic) knocked my GBPUSD trade back, but I’m still in there. I decided not to squeeze my stop loss right up as this could be part of a bigger move, but i’ve moved it to $1.8425, just below the uptrend line. if Sterling holds after the stronger US data, that could be bullish for a further push up to test $1.85-1.8510.
I’m glad I left equities alone this morning. Don’t forget oily numbers out at 3.30ish
August 27th, 2008 at 2:01 pm
well, that’s the end of my long GBPUSD trade, stopped out at 1.8425 for £50 on a £1 bet. Price is currently having a fight with the pivot level, but I’ll watch for a test of the 1.84 level before getting bearish again.
August 27th, 2008 at 4:20 pm
Thanks, FT, nice blog. Think I’ve got it. Noticed one of my charting tools includes the ability to add pivot points, so will have a play around.
Good day for believers in the FTSE uptrend. Highest close this side of the mid-July lows with more to come tomorrow, I suspect (was tempted by the Sep 5800 calls but held off waiting for more premium). Stay long, there could be another 200 points in this rally.
Oh dear, poor old pound. My third limit buy of the Dec future has been triggered at 1.8175. Are we really going to see sub 1.80 this month?
August 27th, 2008 at 4:37 pm
Hi Ken,
yeah glad I took notice of your faith in FTSE; couldn’t bring myself to buy it, but at least I didn’t sell it. Missed the $1.84 trigger to sell Cable. My disaster recovery plan is being tested to the full. My once reliable BT Internet has taken to dropping out on a daily basis, which knocks out a twin screen of information and my laptop is hotter than that Paraguayan javelin thrower, which means that everything works at the same speed as the government. Sterling’s tricky. There’s little doubt about the trend, but my reason for buying it last night is still there-a bullish divergence on the daily RSI. Having said that there’s no confirming candle pattern that I can see, although GG’s the specialist trader on these divergences.Off to rugby training now.
August 27th, 2008 at 5:09 pm
Have to say on the £, I’m not keen, looked as if there was a long trade setting up on 21st, but it didn’t follow through (which is probably what I would have done if I was long at a short 1.88!, which is where the signal was shaping up).
FWIW, the last 2 days action has been on ‘decent’ relative volume, and there hasn’t been much of a hammer or other reversal signal to whet my appetite. US data still the wrong side of ‘good enough’ for a short buck trade for me, at least for now.
August 27th, 2008 at 9:34 pm
short ftse now at 5560 with stop loss at 5600 for a nice profit over the next 2-4days. cant wait to smell some good profit.
August 28th, 2008 at 7:28 am
Yep, normally I wouldn’t touch the pound given the trend and the coming disintigration of the UK Government. And, with 5% base rate, the UK has the greatest potential for recklessly loosening monetary policy — and with an election within the next 18 months does anyone seriously doubt that Brown and Darling will do anything other than blow our and our children’s finances on trying to buy another term?
But I’m hedging a dollar position that I can’t unwind until Feb and I’m happy to forgo possible further falls in cable in return for locking in the gains from the high 1.90s to low 1.80s.
Without this, I’d be inclined to short GBP but I’d use crosses other than cable given that the dollar is in almost as bad a state as the pound.
August 28th, 2008 at 7:34 am
Looking good Charles. What’s your target?
August 28th, 2008 at 12:38 pm
think you better hurry and move that stop charles…
August 28th, 2008 at 12:42 pm
wooowzers!!
August 28th, 2008 at 12:45 pm
hmmmm. finally succumbed and went long FTSE at 5550. Not having much luck being short gold or long USD though,,,
August 28th, 2008 at 12:50 pm
sell now flash!!
August 28th, 2008 at 12:52 pm
what was all that about?
August 28th, 2008 at 1:17 pm
what a spike!!! what on earth caused that?
August 28th, 2008 at 3:19 pm
Hi ken
Just an aside to my comment a couple of days ago on getting more out of some US stock rather than index options.
Comes with a wealth warning, but I have just bought United Airlines @ $10.33 and sold a Sept $7.5 put and a $10 call for a premium of $2. Thought about the $12.5 call, which would have given just over a $1, but feel that the hurricane may yet adversely impact the oil price.
Time to write some index calls methinks, don’t see why the market get excited about a backwards looking GDP number and where corporate profitability is likely on the slide (financials, $ strengthening)
But what do I know!!
August 28th, 2008 at 8:43 pm
Hi GG,
Yeah, your options strategy sounded good. I’ve never paid much attention to US equity options but I have a little used $ account with e-trade so maybe I should look into it. There’s a lot of stuff around that’s going to look good value 5 years from now — the problem is how it’s going to look in 5 months.
August 29th, 2008 at 12:11 am
Evening ken
The only reason i really picked up on ‘the seemingly apparent’ value’ in US equity options was that I was looking at the VIX, which I use as a quasi-market barometer and potential turning point indicator.
Peaks & troughs in one are often closely inversely correlated to the other, (recent VIX high 15 July, market low…Vix low 19 May. market high….) and with the VIX on my charts pushing toward the low end at 19.43% I thought it foolish to be writing index options on that relatively modest level of volatility.
So I had a quick scoot around some US household names-ones I think will survive a) until expiry in 3 weeks and b) others that I wouldn’t mind owning if I HAD too, (via an assignment) and I was frankly amazed.
Walmart’s 1 month implied vol is about 25%, Boeing 35% Apple 34% etc.
And if you go for the ‘hare-um scare-um’ stocks then you can get 54% for Wells Fargo, 51% for US Steel, 68% for Merrill and so on. Not without a significant degree of risk but semi-decent names one hopes might at least make it to the 19 Sep.
Even dear old Intrepid Potash (which I bought more of via an ITM written put last month) has an implied vol of 64%.
United Airlines is not a stock I’m wedded to at all, its just that the implied 1 month vol is 163% and either I’m buying stock at $5.5 (currently just shy of $11) or hopefully, slinging it out at $12 for a 16% return in 3 weeks. Or at least that is the theory! We’ll see how it pans out when Russia invades Poland (again!) and oil is $250 a barrel!
I did some LEH last month and got away with it; having bought stock at under $13 I sold the $15 calls and got a buck and change for them. Got exercised. So I trousered about $3.40 (25%) per share for my trouble in 15 days on a simple buy/write. Sure the stock could have done a Bear Stearns on me, but given the contagion fear/domino effect I think the Fed would have to ‘arrange’ something there too.
The current 1 month implied is 162%! I’m not recommending it and haven’t done it yet, but $1.30 for the LEH $10/$18 Sep strangle looked vaguely appealing for 3 weeks, in admittedly a very dim light!
Agree that on the shortish view it could be that by doing these types of strategies I end up in some stocks at what may be the ‘wrong price’ for a while. Hence the ’safe’ stock with a dash of ‘loony’ stock idea.
I see the written covered call on any assigned stock in the interim as either a potential extra income generator while I wait for a stock price recovery, or potential exit if the stock does rally and I am exercised.
The other vaguely decent thing about most US stocks is that they usually have a front month which is usually a 1 month expiry, unlike some of the UK ones which can be 3 months.